The city was founded by Glouphrie after Oaknock the Engineer, one of King Healthorg's advisors, used an anti-illusion machine to reveal that the silver spirit tree Argento had been killed, and that Glouphrie had used his light magicks to cover up the tree's death. King Healthorg then exiled Glouphrie, who left with some companions and then founded Arposandra.
Nothing but rumours have been heard about Glouphrie and Arposandra since his exile. One of the rumours is that Glouphrie shrouded his new home in mist, which may be why its location is unknown. Hazelmere thinks it may not exist at all, though he believes that Glouphrie himself is still around.
Arposandra was first referenced in the Forgettable Tale... quest during a cutscene where some gnomes, apparently from Arposandra, are talking to the Red Axe Director and Colonel Grimsson about Chaos dwarves they are creating. This shows that the gnomes of Arposandra may be involved with The Red Axe's plans.